Loonie's recent surge ignites concerns about cross-border shopping

OTTAWA - The loonie's apparent march toward parity is adding pressure on Canadian stores to lower prices in time for Christmas shopping season at a time retailers say they can least afford it.

OTTAWA - The loonie's apparent march toward parity is adding pressure on Canadian stores to lower prices in time for Christmas shopping season at a time retailers say they can least afford it.

The newest worry, aside from the impact the soaring currency will have on exports, is that Canadian consumers will once again start heading south in a cross-border shopping frenzy in search of bargains for everything from clothes to furniture to electronics.

"The surge in the dollar is definitely a big concern for retailers in a time of fragile economic recovery," said Mark Beazley of the Retail Council of Canada, the lobby group for the country's large and small retailers.

"Canadian consumers have shown time and time again that they are going to vote with their wallets. If they are not happy, they are going to shop elsewhere."

Beazley noted that this is happening at the worst time for retailers already hammered by the discipline of the recession.

Many had been counting on the Christmas shopping season and buoyed consumer confidence to boost earnings, but now face the challenge that if they don't cut prices to the bone, they will lose customers.

Recession-weary Canadian shopers have already tightened their wallets and are spending more of their dollars at discount chains such as Wal-Mart and Zellers and looking for bargains in everything they buy, from cars and appliances to low-priced clothing, shoes, electronics, groceries and vacations.

There was no reprieve from the soaring dollar on Wednesday. After a brief pause on Tuesday, the loonie resumed its ascent, rising a full cent to close at 97.48 cents US on financial markets.

Currencies seldom move on a straight line - so a reversal or two is likely - but most analysts say a trend is being established and parity with the U.S. greenback is likely by year's end. Longer term, the loonie could be heading for rarefied air.

Influential currency analyst Dennis Gartman, who writes a newsletter from Virginia, says it is becoming increasingly evident the U.S. administration favours a weak greenback as a way to boost exports and predicts the loonie could re-visit$1.10 US, the modern-day high reached in November 2007.

Despite the obvious benefits of a strong loonie to consumers on most imports - including food and gas - and the cost of Florida or Arizona vacations this winter, both the Bank of Canada and Prime Minister Stephen Harper have warned that the quick acceleration of the currency poses a serious risk to the economy as a whole. About one third of Canada's economy is in exports, which become increasingly uncompetitive as the loonie rises.

The Canadian Manufacturers and Exporters estimates exporters lose about $2 billion in sales - most bound for the U.S. - with each one per cent hike in the loonie's value.

The damage to retailers is harder to calculate, but Bank of Montreal economist Douglas Porter says there is already anecdotal evidence that shoppers are starting to head south in search of bargains.

"The chatter I'm hearing is there were big lineups at the border to get back into Canada on Monday night (the last day of Thanksgiving weekend)," he said.

"You have to have sympathy for retailers and Canadian companies. When you see a 30-per-cent swing in the Canadian currency both ways in the space of a year, it's almost impossible to plan in that kind of environment."

Retailers came under intense political pressure two years ago when the loonie hit parity and shoppers began noticing a vast disparity on U.S. and Canadian prices on everything from books, clothes, electronics to autos.

Some book store chains and clothes retailers cut their prices in reaction, but others said they had set their import prices months earlier, when the currencies were at far different levels.

At that time, a report from Bank of Montreal showed the price gap between Canada and the U.S. averaged about 20 per cent.

The bank revisited the issue in July, finding that retailers did eventually adjust to the new reality and that the gap had narrowed to 6.8 per cent on the same basket of 18 items. In the two most visible goods - cars and books, where comparison shopping is easily done - there was almost no difference once Canadian discounts were included.

If the same survey were conducted today with the loonie above 97 cents US, said Porter, the gap might be closer to 12 or 13 per cent.

Beazley said he is confident retailers will adjust if the loonie continues to rise, but noted that the purchasing cycle runs from three to nine months. That means that most retailers have already acquired stock for the holiday season at what is now inflated prices.

But there is also some doubt about how big a factor cross-border shopping will be this time around.

A Statistics Canada analysis conducted the last time the loonie was riding high showed far fewer Canadians voted with the feet than in the 1980s, and the main reason was border restrictions following 9-11 made border crossings a more difficult experience.

The phenomenon has become even more pronounced since the U.S. slapped on passport restrictions on all travellers in June. That month, same-day return trips from the U.S. fell to 1.5 million, a new all-time low, from 1.74 million in May. In 2007, when the loonie last reached parity, about 2.2 million Canadians were making day trips into the U.S.

"Every time that getting across the border gets tighter, we see the relationship between exchange rate and cross-border trips deteriorate further," said Philip Cross, the agency's chief economic analyst.

That's welcome news for retailers, but Cross notes that Canadian stores lose out in another way. The tight border and high Canadian dollar also discourages Americans from visiting and shopping in Canada.

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